Simon Lester: The end of American Internet dominance?

U.S.-European Union trade talks kick off next week in Washington amid fresh allegations that the National Security Agency's spying activities targeted European allies. The cloud over the imminent trade meeting calls to mind yet another potential big loser in the scandal: U.S. internet companies, which could soon feel a backlash from foreign customers and governments rightly wary of doing business with them.

American companies dominate the Internet business. They dominate Web browsing, search, email, and social networking, on traditional computers, smartphones, and tablets. For the most part, outside of a few countries, the rest of the world seems to have been happy to consume American products and services, without much nationalist sentiment getting in the way.

As we now know, this dominance was exploited by the American government, which was able to gain access to American Internet companies' user data to spy on foreign citizens. Not surprisingly, many foreign citizens and governments are taken aback by these revelations. It has been fairly obvious for years that Facebook and Google were monitoring behavior to provide targeted advertising; it was less clear that the American government was also tracking Internet usage.

In the short term, a shift away from American companies may not seem like a real possibility, given the scale of their dominance. Options for non-American Internet companies are quite limited; so far, there is no foreign analogue for Google or Facebook – or Bing, Twitter, Pinterest ... the list goes on – that could compete on an international basis (there are competitors in China and a few other countries, but none with a truly global reach). It is certainly possible that consumer demand on its own might eventually lead to the rise of real alternatives. But that will take time.

Beyond consumer demand, though, foreign governments might step in and actively promote these alternatives – for example, by giving preference to non-American companies through domestic law and regulations, or even requiring the use of non-American Internet products and services. This practice is common with products such as steel in the government procurement arena (think "Buy America"), where governments give incentives to buy domestic products, or require their purchase.

Of course, such actions could violate international trade rules. The WTO's General Agreement on Trade in Services prohibits discrimination against foreign services and service suppliers. However, unlike with trade in goods, there is no blanket obligation not to discriminate against the services of foreign companies. Rather, this obligation only applies where specific commitments have been made.

In the case of the Internet services in question, each government would have to review the commitments it has made to determine the extent to which it could legally favor non-American suppliers. And based on an exception provision in the GATS, an argument could be made that, in order to secure compliance with their data privacy laws, governments need to be sure that the Internet companies used by their citizens are protecting individual data.

At this early stage, it is difficult to gauge the feelings of citizens and governments, both at home and abroad, over the newly revealed U.S. spying programs. The current focus seems to be mainly on individual rights, which is appropriate. But in the long run, the impact on American Internet companies may be almost as important.

In order to avoid losing market share, American companies, as well as the American government, need to restore trust in American Internet services. If they cannot, the Internet landscape may be irrevocably changed, and the first-mover advantage enjoyed by many of these companies will be lost forever.